Is the UK ready for inheritance tax changes?

00:00:05 David Lee, Host

Hello and welcome to ‘Podcasts by Brodies’. I'm your host, David Lee, and today's episode is called ‘Passing the baton - how the UK is planning for the great wealth transfer’. The UK is in the midst of one of the largest transfers of wealth in its history, the so-called baby boomers born after 1945 and Generation X, born from 1965 onwards, have a very significant amount of wealth to pass on to the next generations, but the majority of them have not planned carefully how to do it. In fact, a new YouGov survey commissioned by Brodies suggests only 41% of over 50s have a plan in place to pass on their wealth.

Almost 60% haven't discussed inheritance plans with family or beneficiaries and only 26% fully understand how the UK governments changes to inheritance tax due to take effect on April 26th will affect them. So YouGov asked just over 2000 people age 50+ a range of questions, and to discuss the worrying lack of knowledge which emerged, I'm joined by two Brodies experts, Emily Pike and Stewart Gibson are both partners who regularly advise on tax issues, wealth management and succession planning. Welcome to you both.

So to begin with, Emily, can you tell me what was it that prompted Brodies to commission this piece of research by YouGov?

00:01:34 Emily Pike, Partner

Hi, well really it was these issues that you've just outlined so there have been some major changes to inheritance tax announced in last year's budget and what we have already started to see, what we were seeing, probably from the moment the Chancellor sat down, was questions, concerns from existing clients and others about what those changes meant for them. And then, as you've pointed out as well, this was already in the context of a vast transfer of wealth which is underway and taking speed as we go on through the years. So it was already something that was on people's minds and we really felt we wanted to understand by speaking through this survey directly to people, what their awareness was, what sort of plans, if any, they had in place and how we might be able to help with that.

00:02:37 David Lee, Host

OK, and so what statistics in the survey stood out to you, Emily?

00:02:44 Emily Pike, Partner

Well, for me, there were definitely a couple that were really quite surprising. 26% seemingly fully understand how those changes to inheritance tax will impact them and I mean, I'm involved in this stuff every day, so for me that was quite surprising because I was thinking people would have gone out and got advice and progressed their understanding. But, of course, that means that ¾ of people are saying they currently don't understand how it's going to impact them, and that's I think something that needs addressing.

And the second one was the the perceived lack of discussion between family members as to these plans that they may or may not have about inheritance. So again, most people haven't had any of those sorts of discussions.

And those were definitely two of the headlines that really stood out to me.

00:03:48 David Lee, Host

OK, and what about you, Stewart? What were the other headlines that kind of jumped out of the YouGov survey to you?

00:03:55 Stewart Gibson, Partner

Hi David, yeah, I guess from from my perspective the headlines which jumped out, actually I wonder to what extent there might be a correlation with the headlines that jumped out for Emily. So on the one hand you have 40% of people as Emily said, not having discussed their plans with their family or their beneficiaries, very similar statistic 41% of people have a formal estate plan in place. I'm not sure to what extent there's a correlation between those figures. My own sense is that people who discuss things freely with their family are perhaps more inclined to have a plan in place, but certainly only 41% of people having a formal estate plan in place is something that really jumped out at me.

The other thing again that I think there may be some correlation with one of the headlines that Emily mentioned is that while 26% of the respondents said that they fully understand how the inheritance tax changes will impact them, only 16% said that they've taken professional advice on IHT or estate planning. Now this stuff is, I think it's fair to say, difficult. It always has been difficult. We spend a lot of time trying to get to grips with this stuff and I would suggest that taking professional advice is a fairly fundamental part of fully understanding how the changes might impact you. And so I was interested to see the seeming dichotomy there between the number of people who have chosen to do that and the number of people who think that they fully understand the changes.

00:05:39 David Lee, Host

And Emily said Stewart, that because she was kind of fully immersed in this area, she was quite surprised by the lowness of some of the figures. Would you say that what you were seeing there, how did you feel about that in terms of how that correlated to what you were seeing when you speak to people or are the people who speak to you, the ones who are doing something generally? And it was the silent majority maybe who are showing these high numbers of lack of knowledge?

00:06:06 Stewart Gibson, Partner

Yeah, I think it's very much the latter. As Emily said, we're immersed in this all day, every day or certainly all day, most days. So the people we see are the people who are taking that first step at the very least to put their plans in place. So yeah, our sense of that is definitely skewed. But we are also often surprised to meet people, clients who have sometimes generated quite significant wealth but haven't yet taken even the very simple steps of having a will and power of attorney prepared for example

00:06:39 David Lee, Host

OK, and Emily, would you say the level of awareness has improved in recent years and if so, do you think there is still that, as Stewart just touched on there, that sense of maybe a certain level of awareness but a lower level of action?

00:06:57 Emily Pike, Partner

Yeah, I think that's a really interesting question.

I guess maybe if we put ourselves back a few years, we're sort of in COVID or coming out of the COVID period and that period was a time sadly when a lot of people started to think about some of their estate plans. I think that people did then get themselves more well informed and some took steps, some didn't. Another big change of course has been partly thanks to the farmers in Westminster. But the inheritance tax changes from last year have had an incredible amount of press coverage. Just reading the Sunday supplements at the weekend, there's still articles about this every week. I think it underlines the importance of the changes, but also it's, I think, an unprecedented level of coverage for these sorts of points. So yes, in some ways I do think people are better informed. They've maybe had a bit more time recently to reflect on things, but they've also been surrounded by a lot more press coverage than would ordinarily be the case. And yet, as we've just talked about, not everyone is taking advice on this. So you know we are sometimes confronted by questions which we can only surmise have arisen through conversations with friends, neighbours, family members and are unfortunately completely misdirected and so we have to help with the pieces of advice that are required to fix those points. But yeah the level of information I think is improving but it's not necessarily always translating into taking the best advice around all those areas.

00:08:49 David Lee, Host

OK, thanks very much Emily. And let's talk a little bit more about some of the figures. So only about ¼ of people have a full and complete plan to pass on their wealth. So let's talk about the implications of that. What does that mean, both legally and practically?

00:09:08 Emily Pike, Partner

Yeah, well it's really important to make that distinction I think because OK, there might be some legal deadlines that people, individuals, estates, families might face. But I think often it is the practical time left to put in place a plan that sometimes ends up causing people the most difficulty. If it is left too late, then not only are there those legal tax and other deadlines that might not be capable of being met. For example some of the rules around gifting for inheritance tax efficiency does require some time in order to be most effective, but also, people do just run out of time and they practically are unable to focus because they're getting older. They've got an awful lot else on their mind, sometimes health problems, all the rest of it. So it can really lead to problems down the line, you know, costs, disputes, all sorts of issues that we do try and avoid as much as we can with earlier planning.

00:10:24 David Lee, Host

OK, thank you, and we'll come back to talk about some of those kind of practical issues around families later on. But Stewart, first of all, Emily touched on gifting there, but also you know what's the level of understanding about how gifting works, what inheritance tax is and how that works and also the level of knowledge about dying without a will or intestacy, how much do people know?

00:10:48 Stewart Gibson, Partner

Yeah, it was interesting when Emily was talking about the idea that there's a lot more out there now. There's a lot more commentary around these sorts of issues in the press, and that's a bit of a double edged sword I would suggest because yes, it raises awareness, but sometimes messages get a bit mixed, I think understandably when they're, you know for mass consumption, so to speak. In terms of misunderstanding I mean, I think there probably is or certainly was a perception that inheritance tax is a problem for wealthier individuals.

That may still be right to a degree, but a combination of fiscal drag with, for example, the nil rate band having been frozen for a long time, and that coupled with the proposed changes in the budget, which will see pensions brought into the IHT net. Those sorts of factors are really meaning that inheritance tax is something that ought to be thought about by clients, really, of all levels of wealth. And so, yeah, I think there is possibly still a misunderstanding about the exposure that people will have to inheritance tax and on intestacy. The number of clients that have said to me David over the years that they don't need a will because everything will just pass to their spouse when they die, is occasionally the case if you're lucky, but there are a whole host of other problems which come with dying without a will, which are best avoided and easily avoided.

So yeah, there are still lots of misconceptions around intestacy. Our message on that is very clear, which is that every client should have a will or at the very very least talk to their advisers about the reasons why they ought to have a will.

00:12:37 David Lee, Host

OK thanks Stewart, and let's touch a bit more now on those kind of family issues, those family dynamics and maybe some of those emotional hurdles to not pushing through and taking action on some of these issues, despite that reasonably high level of information. So were you surprised, Emily, that the figure for those who haven't spoken to their family or beneficiaries is so high, almost 60%? And what are, do you think, the emotional or psychological block is to doing that?

00:13:09 Emily Pike, Partner

I wasn't necessarily surprised by that one, I think because in practice I see that a lot and often we're sitting with the older generation, not always, but often we're sitting with the older generation talking to them about their own position and inevitably about their family circumstances and usually trying to encourage them to have those discussions, although in some cases it isn't appropriate for individual reasons. But I think there are a lot of hurdles for people to overcome in having those discussions. Often it comes down to something as simple as personalities, family relationships.

How frequently through their lives have your children been involved in discussions with you about the family finances? If the answer is, well, never at all, until today, then that's going to be a huge change in the relationship. So I think that there are other reasons, more tangible reasons maybe why people don't discuss it with the next generation and with other beneficiaries.

A lot of people I speak to certainly place high store in incentivizing their children to do what they did, create something with what they're given. And having those conversations sometimes people think will disincentivize children from making their own way in the world successfully. And, maybe finally, it's as simple sometimes I think as just finding this information very confidential and lacking the wish to disclose it and that's fair enough. But I think it's incumbent on us as advisors to talk that through with people and to outline for them maybe the benefits of doing it a different way and see what their views are.

00:15:19 David Lee, Host

OK and we'll come back to that in a minute. But Stewart, what maybe are some of the potential implications if families aren't talking about this, what are the potential consequences of not addressing these kind of issues and tensions early on?

00:15:33 Stewart Gibson, Partner

I think Emily talked earlier about legal and tax deadlines, and that's a really obvious one. In general, in terms of the estate planning, the sooner that you have a holistic plan and the sooner that the whole family are involved in discussions around what that holistic plan looks like, the more able you are to take actions that can mitigate your tax exposure.

The other one which I think, to a lot of families frankly matters more, is that if you don't have conversations with your children, with the younger generations about the wealth structures that you have put in place, then there will, I'm afraid to come a time where you aren't here to explain those structures. And yeah, we hope to be the people who are able to explain those structures and to the younger generations of the family, if that unfortunate scenario presents itself. But that isn't really a great substitute for the family having involved the children in those structures over a period of years and helped them to really get to understand what they are, why they're in place, and really how they operate and how they facilitate the lifestyle that you want to enable your family to have when you're no longer with us.

00:16:49 David Lee, Host

OK thank you, and we could talk for hours about family dynamics and the challenges of communication between parents and children and other members of the family, but every family is different. Emily, how do you start? How do you start those conversations? How do you open up that dialogue to try and explain that having these conversations, making these decisions is actually going to help you and your family and everyone in the family in the longer term?

00:17:21 Emily Pike, Partner

So one technique I certainly often employ is just start with something simple. It's often daunting for people to feel that they have to bring the next generation into a full understanding of everything overnight. And so if it's starting off with something simple, perhaps the next generation making a will of their own, perhaps starting to get their own personal tax advice, perhaps sitting down with them and looking at some of the family companies together and just trying to gradually build up a picture of things, I think that can really help.

It's not common, I would say for people whose children have had absolutely no involvement in anything to want to then bring them into it all overnight. So I do tend to suggest that we just gradually try and get into it over time and again, it's the benefit of having the time to plan which I talked about earlier, because if you leave it too late, it's a bit like a well known TV series where the patriarch has left it pretty late and kept control right till virtually the last possible moment and that scenario does arise more commonly than you might think.

00:19:03 Stewart Gibson, Partner

Yeah, I just wanted to add to that I think there's a lot of merit in suggesting to clients who might be amenable to this and merit in having the younger generation in the room when they're talking to us or when they're talking to their other professional advisors and letting them see the plan being made in real time or the plan being explored in real time, I think there's lots of merit in that. And sometimes it can take the pressure off a little bit to hide behind the professionals and let us do the educational elements of the process, rather than making the conversations necessarily intimately personal, if that's something that the clients are less comfortable with.

00:19:47 David Lee, Host

I mean, do either of you sometimes feel more like you need to be psychologists and psychiatrists a little bit as well as lawyers here, that you do need to understand a little bit of those family dynamics to really open up those conversations in the right way. Emily, what do you think about that?

00:20:03 Emily Pike, Partner

Absolutely, I do feel that almost daily and yeah, it's one of the most fascinating and interesting and challenging aspects to this job because no clients are the same. It's an obvious point, but it's so interesting to see how people interact differently within their families and with their advisors and with their right hand man or woman who's been with them through everything. You know, there are all sorts of dynamics at play here, and I think one of the strengths of having a big team as we do is that it's often down to getting the right person as the key advisor who can click and work within that structure. And sometimes you yourself as that advisor have to be pretty flexible in how you deal with things and that's certainly how we tend to try to approach it with our clients for sure, yeah.

00:21:01 David Lee, Host

OK and we we've talked quite a lot here about poor practice. But what about good practice? Stewart, what do those families who have got their ducks in a row here? How do they approach it? How do they how do they really get started? And how do they get a good plan in place?

00:21:22 Stewart Gibson, Partner

Emily has just teed me up for the answer to this one David, no two clients are the same, no two families are the same and our starting point is not what the best families do, but but what should you and your family do? Every plan is bespoke.

There are some general trends around the sorts of things that you might want to look at, starting with the basics is always really good, making sure you have a will, you have a power of attorney, you have a general understanding of, for example, your inheritance tax exposure. That's a pretty good place to start. What it looks like at the other end once the plan has been designed and if appropriate implemented that just varies so much from family to family.

00:22:08 David Lee, Host

OK, and can you give an example maybe of how acting early can you know deliver significant benefits later on in the process?

00:22:18 Stewart Gibson, Partner

Yeah, I mean the classic example of that is around tax planning and there is a school of thought, not one which I necessarily advocate, but a school of thought which says that inheritance tax is a voluntary tax and people might be familiar with the seven-year rule, which says that if you give away an asset and you don't retain any ongoing benefit from that asset then after seven years it will cease to form part of your estate for inheritance tax purposes and effectively pass to the next generation without any inheritance tax. That's a really good example of planning early and the advantages that it can bring. Seven years is a long time, so the sooner that seven-year clock is started the better from a tax perspective. So that's a good example of the kinds of things that planning early gives you the the opportunity to do as compared to planning late which might not give you that same opportunity.

00:23:14 David Lee, Host

And Emily, I guess it's easy to think that this applies mainly to people with significant amounts of wealth, but I'm guessing the message here is that it really applies to everybody who's got anything to pass on to that next generation.

00:23:28 Emily Pike, Partner

Yeah, absolutely agree. And without wanting to give you a lawyer's answer, I might just question the question which is what does it mean to be wealthy? I wouldn't want anyone listening to this who thinks all this talk about inheritance tax and family structures and all of that, and business owners, that just means none of this applies to me, and I think if we see ourselves as having a mission in life, it's probably to try to get everyone to a point where they can have the basics in place and that might be all they need. So if even if you don't consider yourself wealthy, as in I'm not in the rich list and I'm not thinking about emigrating to Dubai, irrespective of that, these are still crucial straightforward planning steps to take for every individual and two groups I'd highlight.

One - older people - I think there were an enormous number of people, going back to our survey, who were in the 75 plus category. Still a lot of them had not put a plan in place at all, and so obviously they're going to be a group that would benefit enormously from doing that quickly.

And then parents of young children, and again we had quite a number in the survey where they had young children, children who are still minors, and they again didn't have a plan in place. And there's a very obvious, straightforward way of making sure that your children are looked after if something happens to you unexpectedly, and that's appointing guardians for them, and that is crucially important and wealth is irrelevant to that question.

00:25:35 David Lee, Host

OK thanks very much. And we'll move towards a kind of summary of what we've talked about already and just coming back to you first again, Emily for anybody listening to this podcast who hasn't really started planning, hasn't ticked many or any of these boxes, what would you say to them and whatever age they are? Is it ever too early to start?

00:25:58 Emily Pike, Partner

I did once do a will for someone who had literally just become an adult in the eyes of the law, I think couple of days before and practising in English laws, I do a lot at that day one when making a will is possible so I would say no, it's never too early, why wait? There are good times and bad times to be delving into certain things in greater or lesser complexity and life has to be balanced alongside all of this, of course. But I would say the earlier that these conversations can be had, the better and the less likely that they're going to spiral into enormous, unwieldy, unachievable projects further down the line.

00:26:47 David Lee, Host

OK, thank you and Stewart, what about first steps then if somebody's listening, what are the first steps they should take to start this process? And I'm guessing that if you do this, it's not just about your assets, it also can help with those family relationships as well.

00:27:03 Stewart Gibson, Partner

Yeah, absolutely. Talk to someone that is step number one. Whether that is your parents or your children or your spouse, talk to someone and it should at some stage as early as possible, include professional advisors as well. Just on that point, I think it's worth stressing that finding the right professional advisor is really important. That's a question of relationship as well, and striking up a good relationship with someone and building a relationship of trust. As Emily mentioned earlier, becoming that trusted advisor to clients is what we are all aspiring to do, and finding someone that's suitably qualified as well, whether that be someone like me who is qualified to practice Scot's law or someone like Emily, who is much more qualified and able to practice across the whole of the UK. Finding someone suitably qualified and talking to them, it does help with getting the plan in place and as you say with family relationships. It allows you to nip any issues in the bud if there are any issues around inheritance or around family tensions, as with so many things, talking about them is the way to prevent them from growing into something more challenging.

00:28:22 David Lee, Host

OK, and Emily, a final word from you.

00:28:26 Emily Pike, Partner

I think just that on the subject of professional advisors, you don't always have to, might come as a surprise I'm going to say this, you don't always have to pay everyone for everything because one of the greatest and most valuable aspects to having someone that has given you advice is that they are there for you and you know that if you give their name to your children, they or their firm will be able to step in and help if they're needed. And the act of you being able to give their name to your children isn't going to cost you anything so, in my experience, that in itself gives people a lot of peace of mind and hopefully is a good incentive to get in touch with the right people to get the advice that you need.

00:29:27 David Lee, Host

So what's your final message Emily to anybody who's listening here, to everything we've discussed today?

00:29:35 Emily Pike, Partner

Well, first of all, have a good think about your own circumstances. Think about if there are any gaps in the advice that you've already taken or really is there something that could be improved? And then get in touch. We're always happy to have a discussion and I would really hope that people would take this as an incentive to do that.

00:30:01 David Lee, Host

OK, thank you very much to Emily Pike and to Stewart Gibson for their terrific insights today. As somebody who was born in 1967 and you know just made it into Generation X, not quite a baby boomer, and is the father of four children in their 20s and two dogs, I can tick some of those boxes, but certainly not tick all of them. So it's certainly given me and I'm sure a lot of other people listening very, very serious food for thought.

So this has been an episode of ‘Podcasts by Brodies’, where leading lawyers and special guests share their enlightened thinking about big issues and developments in the legal sector and what they mean for organisations, businesses and individuals across the economy and wider society. And if you'd like to hear more, you can subscribe to podcasts by brodies on all your favourite podcast platforms and for more information and insights, please visit brodies.com.